Fall 2017 1

What is the “Best” Age to Start Collecting Social Security?

by A. Scott White, CFP®, ChFC, CLU
President, Scott White Advisors

People often ask me, “What is the best age to start collecting my Social Security retirement benefits? Should I take them at age 62, at full retirement age, or should I wait until age 70?” As you may know, people have the option of receiving their Social Security retirement benefit at age 62. But if you start at age 62, you’ll receive up to 25 percent less than if you waited until full retirement age at 66 or 67 (depending on the year you were born). And if you wait until age 70, you can get up to an 8 percent additional benefit for every year you postpone.1 So, what is the “best” year to start collecting benefits?

That’s a trickier question to answer than it might appear at first glance. To begin with, we must define the word “best.” Often people asking this question have heard or read that Social Security is going bankrupt in 11 years or in the year 20282. Therefore, the person asking the question might suspect my answer to be, “Take your retirement benefit at age 62 because who knows if anything will be left in Social Security after 2028.” But this logic simply isn’t true. There is no account at Social Security with your name on it that will be drained to nothing if Social Security goes bankrupt. Social Security is and has always been a pay-as-you-go benefit program, meaning currently employed workers pay taxes into the system to cover the cost of the retired workers’ benefits going out. The 2028 year simply refers to the time when more benefits will be paid out than workers paying in for Social Security disability benefits, not retirement benefits.

Because of changes to Social Security enacted in 1983, both disability and retirement benefit are now expected to be payable in full on a timely basis until 2034.3 Most people do not realize that currently Social Security has $2.79 trillion in assets in reserve.3 These reserves would have to be exhausted before current benefits could be cut. The Social Security trust fund reserves are projected to become exhausted in 2035.2 At that point, the taxes continuing to be paid into the system are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program to pay full benefits in the future. The Social Security Board of Trustees projects that changes equivalent to an immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.4 Individuals can still expect to receive a Social Security retirement benefit even if Congress does nothing about fixing the program until 2035. And if Congress does nothing to correct the program over the next 18 years, then people can expect their benefit to drop by about 25 percent.

The next meaning someone could reference by inquiring in the “best” age to start collecting Social Security retirement benefits is, “At what age will I collect the most dollars out of the system?” And I understand the emotion behind this statement: “I paid taxes into the system all these years, I want to make sure I get all I paid in out and then some.” Again, there is no simple answer to that question, because for me to honestly answer that question, I would have to know what year you will die, and I suspect most people can’t tell me what year that will be. Obviously if you knew you were going to die at a relatively young age then the answer is clear: Take your benefit at 62. And when I point out I can’t answer the question unless I know when you’ll die, the question might get restated to ask, “If I took my retirement benefit at 62, and invested it until I was 70 years old, how much would my investments need to earn for me to break even at 70?” And my answer then is, “You need to earn a guaranteed annualized return of 8 percent to break even, and I do not know of any investment like that in existence.” You might make more than 8 percent, but it won’t be guaranteed. Besides there being no such thing as a guaranteed 8 percent investment return, most people continue working past age 62. And when that happens you’ll probably need a lot more than an 8 percent return to break even. The reason? Because Social Security calculates your benefit based on your 35 years of highest earnings, and for most people with even a part time job at age 63, most likely you’ll be earning more than what you were making at age 28.

What I do suggest for those who can defer collecting benefits is to wait until age 70. Of course, if you don’t have the ability to wait until 70, there really is no question to ask, because you’re forced to take it before then. But if you can wait, I suggest you consider the biggest risk in retirement, which is inflation. And the longer you live, the more devastating inflation is for a retiree living on a fixed income. But I suggest for people who are able to wait to 70 that I’d rather see them wait, even if it means dipping into their investment portfolio. This way they will get the highest Social Security benefit possible and all future inflation adjustments Social Security offers will be on the higher amount.

Another way to frame the question about what age to begin taking Social Security benefits is to think of your real risk in retirement: living too long. After all, if you have the means to defer to 70 before receiving benefits, and you did die young, what difference would it make when you started receiving Social Security benefits? You would not have run out of money during your lifetime. The number one thing I worry about, as a financial planner, is if there is a reasonable chance a client might run out of money in retirement. Studies have also found that poverty rates were more than 50 percent higher for people 85 and older compared to retirees in their late 60s and early 70s—suggesting that the longer you live, the more likely your money is to run out. While more recent studies have found poverty rates not quite as bad, these newer studies still confirm that older women are poorer than older men.5 And since Social Security calculates a female widower’s benefits based on the husband’s Social Security benefit, I want to make sure he’s receiving the biggest benefit he can get. And if he died while waiting to get his benefit at age 70, then the worst case for the widow is that Social Security would use his full retirement age (66 or 67) benefit to determine the possible widower’s benefit.

So, to answer the question, “What is the ‘best’ age to start collecting Social Security benefits?”, I answer the question with a question: What is the highest use of our Social Security retirement benefit? In my mind, there is no higher use for our benefit than to offset the risks of living too long. And if that is the intent, then my answer is to wait as long as you can if you believe you’ll live to 70 and have the financial means to do it. Because if you are one of the unfortunate few living in poverty in your 90s, then having the largest Social Security will possibly make a difference.

1 Is 70 Too Late to Claim Social Security? By Todd Campbell for The Motley Fool @ CNNMoney, August 3, 2016.

2 Scathing New Report Shows Just How Bankrupt Social Security Really Is by Tyler Durden, Zero Hedge, June 29, 2016.

3 Is Social Security Going Broke? By Jill Schlesinger, Money. August 16, 2016.

4 The Future of Financial Status of the Social Security Program by Stephan C. Goss Social Security Bulletin, Vol. 70 No. 3, 2010.

5 Older Americans Aren’t as Poor as We Thought by Ben Steinberg, Bloomberg News, Aug 1, 2017.

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